Four Most Dangerous Words in Investing

By Allan Jaster and Jona Husbands

As always, we keep a sharp eye to the horizon… scanning for trouble.  Though we’re currently in a lull – we’ve got ourselves a storm brewing.   The Democrats and the Republicans are both gearing up for a huge showdown.  Get ready for some serious mudslinging over the Debt Ceiling and U.S. credit downgrades, and government shutdowns, etc.

So (from the title) the Four Most Dangerous Words in Investing are “This time is Different!”   Framing any economic/political scenario with “this time is different” automatically puts you in a fearful mindset.   And fear leads to a poor investment experience and poor decision making.

So let’s first answer the question; “is this time different?” or have we seen all of this before?  And if we have seen it before – let’s then examine the Market’s response.  Armed with some historical references maybe we’ll have an idea of how we might position ourselves to come out of this mess unscathed.

Raising the Debt Ceiling

Debt Ceiling

Since our Government operates as a negative cash flow business… we have to borrow $118B per month (yes… that’s a B for Billion) to pay the bills.  Deficit spending has certainly happened before and raising the debt ceiling has happened before as well.  In fact- it’s happened 74 times since 1962… and 18 of those were during the Reagan years.   So… not only have we seen it before – we’ve seen it lots. Nothing new here.

Government Shutdown

Government shutdowns are not impossible, in fact, after looking at the long list below it’s tough to even call them “rare.”  In April of 2011 NBC’s Pete Williams published the below list of historical Government shutdowns.   We’ve had lots of these… we just haven’t had any lately.   So there’s nothing new here either.

  • September 30 to October 11, 1976 (10 days)
  • September 30 to October 13, 1977 (12 days)
  • October 31 to November 9, 1977 (8 days)
  • November 30 to December 9, 1977 (8 days)
  • September 30 to October 18, 1978 (18 days
  • September 30 to October 12, 1979 (11 days)
  • November 20 to November 23, 1981 (2 days)
  • September 30 to October 2, 1982 (1 day)
  • December 17 to December 21, 1982 (3 days)
  • November 10 to November 14, 1983 (3 days)
  • September 30 to October 3, 1984 (2 days)
  • October 3 to October 5, 1984 (1 day)
  • October 16 to October 18, 1986 (1 day)
  • December 18 to December 20, 1987 (1 day)
  • October 5 to October 9, 1990 (3 days)
  • November 13 to November 19, 1995 (5 days)
  • December 5, 1995 to January 6, 1996 (21 days)

Now to the million dollar question… when all this happens “how’s the market going to respond?”  We’ll get to that, but first let’s ask a better question… the real question – is anything about this entire debacle a surprise?   Will you be caught off guard in the least over this?  Or… have we all seen this fight coming from miles and miles away?   Of course – we all see it.  It’s in the news every night of the week!  Remember – if YOU feel it and YOU are worried about it… and your buddies at the coffee pot are worried about it…make the assumption that EVERY OTHER INVESTOR in the world is just as worried as you.   So if it’s NOT a surprise – then by definition, it’s already all priced into the market.   That’s right – every investors estimate of the outcome (both good and the bad) from all this has already been pushed into your portfolio.   Everybody sees the iceberg and everyone has already course corrected.   Now… we just need to wait it out and see how big the iceberg is.

Let’s look at what the market did during the Clinton years (below graph) as he squared off with a Republican Congress led by Newt Gingrich.  The gloves were off and deep lines got drawn in the sand during this contentious mini-war.   The result?  The Government shut down… twice.   The second shutdown was for 21 days!   Ah-hah… but what did the market do?    It got knocked around – but in the end it was up.

Market During 1995

Okay – here’s where things get downright scary… and this is exactly why we don’t try to out-fox the Market.  Please look at the circled portion of the graphs (above and below).   Notice the remarkable difference?  The circles show the “day after the deal was made.”   When the deal was reached in 1996 the market was down sharply… but most recently, the day after the Fiscal Cliff was avoided the market was up!

S & P

So what did we learn after our historical review? 

  1. We’ve most definitely seen all this before.
  2. Bickering in Washington will probably affect the U.S. market temporarily.
  3. We cannot anticipate how the market will respond during the upcoming event and any attempt to do so is pure speculation – not investing.
  4. The fact that it’s in the news means a collective estimate of the effects of this event has already been priced in to the market – and your portfolio. 

The good news is – you are fantastically diversified and globally exposed.  While some of your portfolio might get jostled a bit, many of the funds you own don’t have much exposure to the on-goings of Washington.  And that is by purposeful design.

Regardless of how this plays out never forget the most important rule of investing:  “when your boat starts to rock – hunker down… don’t jump out.”

Hang tough – keep your optimism and call us with questions or concerns,

Allan Crop

Jona Crop

Allan Jaster and Jona Husbands
Partners

Archer Consulting Group
Financial, Legal and Lifetime Care Strategies
Special Needs Planning
1717 St. James Place, Suite 205
Houston, TX  77056

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